With all of the uncertainty over the economic future at
least one thing has been agreed upon by all sides – the next US president will
be the Democrat Joe Biden.
The Biden bounce – how long will it last
So far financial markets have reacted positively to this fact, stocks in Asia rallied greatly in hopes of improved trade relations and even the FTSE saw a boost. But as focus in the UK returns to Brexit and the lack of trade deal with the EU, it is clear there is still much to be concerned about.
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| Photo by Gayatri Malhotra on Unsplash |
A Biden administration could potentially determine the shape of relations between the UK and the EU, as the president elect has already highlighted disapproval in Britain potentially breaching international law with aspects of the withdrawal agreement.
Whilst Biden has the presidency, the Democrats do not have the majority in the senate – as far as the US economy is concerned, a lot depends on the kind of stimulus measures that will be announced in response to the pandemic.
Economists predict that a further stimulus is likely, however it will be a lot more restrained compared to a scenario with Democrats holding the White House and the Senate. This is good news for investors, as a smaller fiscal stimulus package would likely put the pressure on the US central bank to do the heavy lifting. In other words a Democratic president without a democratic majority in the Senate will likely keep both government spending down and interest rates low.
There is the potential for a party split between presidency and the senate to have longer term benefits too – having neither a “red wave” nor a “blue wave” tends to mean fewer big policy swings on matters such as taxation, which has been a boon for the stock market in the past. Of course the past is not a guide to the future, but what has been good for the US market has tended to have positive effects on markets around the world.
Stock market returns of different US political scenarios since 1945
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| Photo by Louis Velazquez on Unsplash |
Democrat president
with split congress – 13.6%
Democrat president with Republican congress – 13%
Democrat president with Democrat congress – 9.8%
Source: CFRA Research. (Past performance is not a guide to the future)
For those with investments in the US or wishing to increase exposure to the world’s largest market, a Biden presidency and the relative stability it ought to bring is certainly welcome news. The main cause for thought will be that large parts of the US market still look somewhat expensive by many of the conventional measures.
The most prominent example being large technology companies, which are rarely cheap anyway, have reached all-time highs thanks in no small part to a lockdown driven boom of use. Investors are growing in confidence that without control of the Senate, Democrats will have a harder time pushing through legislation aimed at cracking down on the technology giants.
The overall outlook, at least in terms of the US, appears to be a lot more positive compared to just 6 months ago – with a the waning of the initial pandemic hysteria coupled with a stable government, there is good reason to be optimistic on the future.
This article is not advice and has not been prepared in accordance with legal requirements designed to promote the independence of investment research – no recommendations are given in the buying, selling or holding of any investments. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Always seek professional advice.